The Crisis of Crises

From high finance to peak oil, to climate change,
the world is seeing a convergence of numerous
crises. We join the dots and look to the future.

Part 1: The Financial Crisis

a dysophia publication
anti-copyright, October 2009
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Crises are fashionable in the environmental and left-wing movements.
Every few years there is a new topic of debate on the problems facing us if
we go down our current systemic abuse of global resources. It would be
impossible to draw out a comprehensive list, but pollution, peak oil, fossil
fuels, fossil water, genetic modification and the big one – climate chaos –
have all been talked about to various degrees and accepted as issues on
requiring action.
Into this we can now add the currently ongoing financial crisis. Though it is
no longer dominating the headlines, governments in the West are still trying
to shield their populaces from the effects of it, and the worst is possibly still
to come.
As we write, nations such as Iceland and Latvia are struggling from
economic collapse, and the big question troubling economists and politicians
is whether the recession is going to kick back. There is much excitement
over tentative signs of recovery, but how sustainable it will be is hotly
debated.
Thus, the purpose of this pamphlet is twofold:

1. To outline broad economic trends of the last decade and give you
some insight into the main financial indicators that are going to affect the
next few years and what they mean in practical terms.

2. To show how these will affect government actions, and thus our
capabilities to respond to all the other crises that are coming our way.

It is fair to say that the next five or so years are likely to be very
interesting if not outright challenging. To complicate it much further, it is
increasingly apparent that we cannot separate out our responses to climate
change, peak oil, etc from what is happening in the financial world.
Underlying many solutions proposed by institutions, governments and often
grassroot movements, is a set of unrecognised assumptions. This results
from a fundamental lack of understanding of how our society is structured. It
is not sufficient to say that capitalism is not working, it is just an important
to realise that physical infrastructure from logistics to sewage systems also
play an important part, and in turn this brings in other issues such as
weather and resources. To see the interconnections we need to re-examine
the world from a wider view-point than we are accustomed to.
Any analysis which does not take into account how our society has
developed precisely because of access to cheap oil, energy, water and stable
weather is going to fail future tests. Crises are converging and we need to be
aware that much of the effects of capitalism is actually hidden from view,
and that many of our preferred solutions still rely on it in ways we do not yet
fully grasped.

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The Financial Crisis
Though commonly referred to as the Credit Crunch, the current financial
crisis is less about a loss of credit than it has been about debt. The periodic
crises in capitalism are well documented regular events. They are based
around speculative bubbles - where investors get excited about a new
industry, pouring money into it in the hope of making ridiculous profits once
it takes off. This creates an unnatural situation where the sheer quantity of
money invested distorts the market, but nobody wants to be left out.
Sometimes it works, but more often than not the market “overheats” and the
bubble bursts under the pressure of expectation.
Mostly it is the rich who get burnt with only indirect effects in the wider
economy, but there are powerful side-effects all the same, and not just
because it drains money from other parts of the economy. The Act of Union
which deprived Scotland of its own government in 1707 was brought about
by the Scottish ruling classes being ruined because of their heavy investment
in what was known as the South Sea Bubble, one of the biggest speculations
of its time. The government in London bailed them out on the promise that
the Scottish peers agreed to the Scottish Parliament being abandoned.
However, like the Great Depression of the 1920s, the current crisis is found
on the reckless behaviour of banks themselves. With historically cheap
interest rates, borrowing money became much easier. However, to make a
profit you want to lend it back out at a higher rate of interest - the profit
coming from pocketing the difference. Therefore, banks and other financial
companies began pushing debt as their main way to make money.
When there is a short term view point, and the overall value of business
deals is what dictates bonus size, there is no time spent considering what
would be the effect even five years down the line. So when you have 7%
interest rates on mortgages from people with good credit ratings and 14%
on those with poor ratings (that is sub-prime), you go for the latter.
The debt that was used to fund the credit boom came from the ordinary
person in the street. Sub-prime mortgages were just one example of the
encouragement to get people, and even corporations, into debt.
Consumerism became a way of life, and we were told it was all going to be
fine because interest rates would remain low.
Companies were encouraged to grow to generate business and to take
advantage of the consumer boom, but this growth was based on the
available of cheap loans to expand – which was fine as long as the economy
continued to grow, as the profits from the companies was anticipated to
cover the value of the loans.
Private investment firms such as hedge funds resorted to even more
cynical strategies, buying up otherwise healthy companies using cheap loans,
and then through financial manipulation extracting the anticipated future
profits from the company for themselves, which resulted in the company
being loaded with future profits having to pay off.

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This growth had to be fed by cheap goods for people to buy. And goods
equates to factories consuming ever greater water, oil and other resources,
whose capitalist owners needed these supplies to be cheap so they could
keep profit margins high. The system also required cheap labour to produce
the goods, which has lead to the exploitive practices such as sweatshops,
and effective economic slavery.
Many social and ecological problems highlighted by NGOs in waves of
publicity over the last two decades have clear roots in the consumerist boom
of the wealthy countries of the Global North. The war in Iraq and the arming
of the Nigerian government by Shell are just prominent examples of an
insidious process happening across the world where the needs of global
businesses have been used to disrupt indigenous peoples and ecologies.
A set of industries have grown up around this debt culture. The UK in
particular grew strong on the back of this, a process accelerated as a result
of Thatcher and neo-liberal politics, with the service and finance industries
replacing manufacturing as the dominant players in the economy. Other
countries have embraced similar models, but few as completely as Britain.
So when the governments talks of restoring confidence and bringing the
system back up, its means returning to the same levels of consumerism we
in the Global North have been enjoying for the last couple of decades.

However, to step back a bit, the bankers did not stop with taking profits
from consumer debt and mortgages. The consumer debts and mortgages
were parcelled up and sold on to other institutions with the promise of the
wonderful returns that would be available when the sweetener deals of low
interest rates on the debt in place for the first few years stopped switched
over to double figures. This process was basically gambling using the
anticipated future profits made from the debt for the down payments. And
this was just the simplest of the various financial products devised to take
existing income streams and turned them into tools of making yet more
promises. Sub-prime mortgages were the foundation for many of these type
of deals, so when they turned rotten the whole system was affected.
Through leverage, bankers and hedge funds bet on everything possible and
did so without thought for the wider picture. They did this time and time and
time again, until this shadow banking world was worth trillions and larger
than the actual banking industry which traditionally focused on
straightforward savings and loans.
One cannot underestimate just how much of this world was gambling, or
making money helping others gamble. It was all happening behind the
scenes, and even the regulators such as the Financial Services Authority in
the UK, or the Security and Exchanges Commission in the USA had little idea
how big it was, or just what was happening.
And as with all gambles, it relied on the confidence that prices – shares,
wages, commodities – would all continue to rise forever, as capitalism, it was

5
believed, had managed to sort all its problems out (as long as you were in a
rich country).
It was even dressed up as a way of safely dealing with risk. Any loan
carries risk, and the interest rate is set on how likely it is to be paid back –
the greater the risk, the higher the interest rate. This simple idea was turned
on its head, and risk itself became a product that could be sold and used to
turn a profit. Risk became part and parcel of the way of making money, and
because of the high returns investors became more and more greedy for it,
believing that through the complicated financial products which mixed up low
and high risk debts they had off-set any real danger of being exposed to it.
Only belatedly was it realised that the risk was increasing throughout the
entire system, and not simply going away as had been argued. And, like a
minefield, it turned out to be absolutely everywhere.
The collapse could have happened at any time, but it was the sub-prime
market which went first, hence it is the best known of all the debt industries
that played a role. What happened is that mortgages had been massively
over sold to people who could only afford them while the interest rates on
them were kept low. However, written into the small print was that after a
few years they would seek large hikes. No longer able to pay, the number of
defaults throughout the US, slowly and quietly began to rise.
The debts they had been depending on to help fund their various deals
were turning into empty promises – in the jargon, these debts had become
toxic, not just because they were bad in themselves, but they were affecting
a whole other raft of financial products at the same time.
It was realised that the financial institutions were sitting on a vast quantity
of toxic debt that might never be repaid. Hundreds of billions of dollars
worth, and worse it was so convoluted they were not able to work out how
deep the problem went. They lost faith in themselves and also with other
financial institutions. If they were in trouble, then that meant everyone else
was likely to be just as precariously balanced: confidence went, and the lines
of credit used to generate the short term debt the business world was
dependent on to keep paying for things disappeared. Once started this
became a downward spiral that infected the entire business world as well.
With the encouragement of banks, many companies had taken on huge
debt either through mergers, or by being bought-out, naturally financed by
the banks and other finance companies, for which it was a source of income.
While there was growth this was fine as the debt could be paid off from the
profits; with a downturn that was no longer the case as there was not as
much money coming in. With the banks in trouble, they were unable to
continue helping companies cover their debts and reined in the lines of
credit. It did not matter if a company was profitable on its ordinary day to
day business, if it could not service the debt it had been saddled with then it
was in trouble. It was forgotten that financing expansion through only works
when there is cheap credit, and that was now gone.

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Governments step in
With the golden boys and girls in the financial industries in trouble,
governments had to act to protect capitalism, as the only ones left up to the
job. The investment banks were failing but every financial institution from
pensions funds to the high street banks were in just as deep and were in
danger of going into death spirals.
Businesses and councils would not have the credit lines needed to pay their
staff. Pension funds would have gone under. Credit cards would have ceased
functioning over night. All savings would have been lost.
This is not exaggeration. These banks really were too big to fail and
capitalism witnessed for the first time a situation where its neck was on the
line because of its own behaviour. The market place had failed all the
promises the neo-liberals had made in its name.
Governments had no choice but to step in, putting in place guarantees to
stop the banks from failing. Economics dictated their actions; the choices
they pretended to have were never really there. They promised to support
them to keep them alive, to open up new lines of credit that were to be
passed on, and to make sure that people did not lose their savings.
It worked, but it came at a cost, and it is the public who now bear the cost,
the huge debts the governments accepted on their behalf.
We will mostly focus on UK financial problems, but the pattern is repeating
across the globe. The banks had borrowed and lent out on levels far greater
than they were capable of handling. With the world going into shock, that
ability to pay back (known as servicing debt) also shrunk and the downward
spiral continued.
Ireland, Iceland and the Baltic States are simply at the forefront of a
process that is happening across the globe. With much less in the way of
resources to buffer them, they have been hit hardest, early on, but many
other countries are slipping the same way, spending their reserves propping
up their economies. This is why the world is looking to China and India,
hoping the growth of consumerism in those countries will be strong enough
to prop up ailing Western economies.
There is debate over whether the governments moved too late or not, but
either way what they were doing was simply trying to slow down the
deceleration of the global economy, hoping that they caught it in time before
it went critical. Though it is no longer front page news, the crisis is not over
yet. There are more aftershocks due in the next few years. The outcome is
unpredictable, but in the next section we will introduce some of the trends
that shape the UK's ability to react to them.
We have simplified a lot above, but the broad trends are there to see –
debt laden governments and a shift of global geopolitics to the likes of
principally China, but also Brazil, India and Russia (the BRIC nations). This is
one of the main factors as to why the G20 group of nations is now a more
influential institution than the G8.

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Introducing the Debt Markets
When it comes to the financial world governments are treated the same as
corporations, especially those following the neo-liberal model, such as most
countries in the traditional West have done. The only difference is that
through taxes they have a guaranteed income stream.
The UK government, like other European powers, in the eighteenth century
realised that all the wars of expansion were proving to be very costly. It
needed ready cash to pay for weapons, transport and the wages of its
soldiers. So they went to the banks who supplied the finance in return for
promises of future dividends on that debt. This is how the banks such as
Barings, Warburgs and Rothschilds made their great fortunes.

A bond is a promise to pay back interest over a length of time on an
amount of capital provided to the company. When that company is
actually a government, then it is known as a gilt. Essentially it is a
glorified IOU with promises of profit on the money loaned out

With a government, the received wisdom is that they for the most part do
not fail. Investing in gilts is seen as a guaranteed income but one that does
not have high interest rates, volatility, or excitement attached. However,
many pension funds and other governments see them as a way of protecting
themselves against rainy days and also ensuring the absolute value of their
money does not go down.
Thus, China currently owns $1.4 trillion of US debt, and the Middle East as
a whole $1.7tn. The UK government is likewise indebted.

Volatility – how much the price of something will fluctuate; the more
it fluctuates the more city traders can make money on it; high
volatility also indicates some instability in the market around either a
company or commodity supply or even a government.

What is particularly important about debts such as bonds is that they
protect the value of the money invested in them, which is what makes them
attractive to investors. If the interest rate on them is higher than inflation
rates, then they will increase the absolute value returned. In this case, the
person paying back the debt will have to work harder in order to be able to
afford the interest repayments. This feature is one of the key mechanisms
which makes capitalism inherently exploitive, and why usury is considered
immoral by many societies. Once you are in this cycle you tend to be at the
mercy of the people who made you the loan.
Understanding how this works will give you a strong insight into how the
capitalism model works.

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A debt of £10 in 1970 was a lot; today, because of inflation, it is very little
in real terms. This is because what the £10 would have purchased you then,
would cost a lot more now. So the question is how to make sure that £10
increased in value over the intervening years so that at the very least it
would purchase the same amount of goods today as it did in 1970? For
example in 1970, £10 would have brought you 110 loaves of bread. Today, it
would buy you 7. In terms of keeping yourself fed, that is a big change.
How much goods your money can buy is known as its purchasing power,
and is an important concept for when we look at currency exchange rates.
The measure of how purchasing power changes is the rate of inflation.
If you simply kept the £10 under your mattress, you would be effectively
losing money, as its purchasing power declined over time. To maintain its
purchasing power you need to invest it in a way that it gives an income on it
that you can add to the original amount. This can be a savings account, or it
can be any investment which promises an interest rate that at the very least
matches the rate of inflation – preferably higher if you want a profit from it.
Thus, if you invest your £10 at 5% interest rates, each year you make 50p
on it. After your first year, you now have £10.50. After two years you have
£11, and so on. This being the financial world life is not quite that simply, as
interest rates will change, interest can be applied in different ways, and so
on. The key thing is that your basic investment is increasing in value so that
it can continue to purchase the same amount of goods it would have done
when you first made it.
Understanding this process will give you a lot of insight into the basic
motivations of the financial world, who are as much concerned about seeking
to protect the values of their investment in the global money markets as
they are to profit from it. Indeed, for a long time simply protecting
purchasing power was the prime motivation, but the financial changes made
under Thatcher and Reagan opened the worlds eyes to how profits could be
made at the same time, not from the production of goods, but by moving
money itself back and forth.
To illustrate further, sticking with how many loaves of bread our money can
buy each year, lets assume a very basic model where inflation rates remain
at a constant 5% year on year. Then the difference in purchasing power of
£10 left untouched, and £10 invested at 5% changes as follows:

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Setting Interest Rates
When we hear of Bank of England base rate (or the base rate of any central
bank such as the European Central Bank, the Federal Reserve, etc) it is
essentially setting the payout to be expected on gilts. So if base rate is low,
then gilts are not interesting to investors seeking to make money, which
makes it hard to attract people willing to make loans to the government.
Furthermore, a necessary function of gilts and bonds is to protect the
purchasing power of money through the use of interest rates, otherwise they
become unattractive to investors. Practically, this means they are closely tied
into the rate of inflation. If inflation goes up and base rate doesn't the value
of the money invested goes down and investors run away.
Base rates are fundamentally important to the financial world - banks,
mortgage companies and even insurance companies and pension funds all
use it. It is through these mechanisms that the base rate affects the rest of
the economy. There are few markets that it does not ultimately affect.
A secondary use of base rates is to measure how much other interest rates
have deviated from it, as this is a useful indicator for there being problems in
the system.

Interest Rates & Inflation
Generally changes in base rate lags behind inflation, but they are inter-
twined through how base rate affects other interest rates, which are in turn
passed onto consumers base rate levels will affect inflation in turn.
During financial crises the normal patterns will break down for a while due
to central banks and governments intervening in order to manage part of the
economy. However, this can only be a limited intervention and the longer it
goes on the more trouble is stored up.
There is a natural cycle taking place here, and because inflation and
interest rates are so intertwined predictions can be made. For instance, if
inflation goes up, then ultimately base rate will have to rise, putting further
pressure on the public who are exposed through credit card debt, car loans
and mortgages.
However, inflation is affected by other issues, often on the global scale, so
real long term control remains in the realm of the global economic situation
rather than the short term efforts of the local governments and banks.
This is one of the reasons why governments are so scared that others will
take a protective point of view, as this brings a lack of unity that hampers
guidance of the wider the global economy. An example of this was when
Ireland offered to guarantee all the savings in its banks. Investors
threatened to decamp en masse to Ireland which would have hurt the UK
and other countries greatly through their banks losing much needed capital
in the form of savings. Thus global economic pressure forced the UK and
other governments to follow suit to prevent a crippling outflow of money.

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UK Government Debt
Currently the UK Government is running up a vast debt on our behalf.
Besides having to bail out the financial sector by agreeing to underwrite toxic
debts, there is still the day to expenditures, already partly financed through
borrowing. It also has to pay wages, and meet all its existing commitments
such as the NHS, education and defence.
A significant source of government revenue comes through tax on profits –
VAT and company tax. The shrinking economy has hit this hard – the
financial services sector at one point formed 15% of the gross national
product and so its overall contraction has opened a hole in budgets. The
housing market contraction has done likewise. The Government has tried to
stimulate consumerism in order to halt the downward spiral through cutting
VAT and car scrappage schemes, but both take money from the budget.
Gordon Brown once boasted that he had created a system which eliminated
the cycle of economic boom and bust, trusting in the market place to sort
out any problems. Due to this he spent most of the existing government
reserves, so there has been less money stored away to fall back upon when
the shock hit the system.
The result of declining income and poor reserves means the Government is
forced to borrow more than ever before, quadrupling as a result of the crisis.
The proportion of government debt to the Gross Domestic Product (the total
income generated by a country in a given year) is increasing to points where
economic institutions are sounding warning bells. In July 2009 it was at
56%; the Government estimates it may go as high as 79% in 2010, while
the International Monetary fund warns it could reach 100%.
The problem is that if it does not borrow so much it cannot meet its
existing commitments. The simplest way to reduce its borrowing is to cut its
expenditure, but that is very politically sensitive, especially with an election
coming up in 2010.
It is further complicated by the fact that in the UK government spending
forms a significant part of the economy in the first place. For 2009 it is
estimated at 45%. There are a lot of jobs depending on the NHS, military
and so on, so cuts in government spending will have further knock on effects
on the economy as a whole.
The government argues is that it will be fine once the world comes out of
recession and growth continues as “normal”. Revenue will increase, so it will
be able to pay off the interest on the debt and the capital itself. That inflation
will reduce the value of the debt in the long run, and so on.
It is a big gamble, and power over what will happen globally is not within
its grasp. It is complicated by matters such as currency exchange rates and
access to resources. This debt has to be paid for, thus it is taking money
from the future. As such it will will play a pivotal role in how we are able to
handle the other crises facing us. Once you start taking into account climate
change, peak oil and geopolitics, it will hamstring the UK.

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Rolling the Dice on Debt
So, how likely is the UK Government to win its gamble? It is impossible to
say, especially given there is quite a number of factors, all interrelated, and
which in some cases have contradictory effects. This is the fun and games of
economics that vexes the even the brightest economists.
It is possible to speculate a lot here, but in the end all we can only look at
trends and make educated guesses. Even computers struggle to merge all
the different variables into model that predicts well, especially with intangible
factors like public confidence to account for.

Confidence
Public confidence is remarkably important. If the public are nervous about
jobs and interest rates, they save rather than spend, so reducing the amount
of money returning to companies, whose profits in turn feed the financial
industries. More saving also means more interest payments for the banks to
make. Stimulant measures such as car scrappage schemes are short term
only. Those who can afford it take advantage of it early on so its
effectiveness quickly wears off.
Saving has some benefits to an economy in recession – it stabilises the
banks, gives them more money to invest in new business deals and so on.
The question is whether the savings are sufficient to support the system,
especially when it is clear that so much of the population are addicted to
debt in order to maintain their lifestyles.
For years banks ignored basic economics and over-stretched their balance
sheets with debt. This is a problem in itself, before one gets into the increase
risk of loans defaulting as happens in an economic downturn. The drive for
consumerism has meant that though there are more savers than those in
debt in the UK, the total debt still outweighs the value of the savings. A net
debt is survivable as long as the economy is growing, but in a weak economy
it can become a significant threat to its stability and unnerves investors.
Governments had no choice in bailing out banks as the systematic loss of
confidence was causing ordinary banks to fail since they relied heavily on
short terms loans from the global money markets to see them through day
to day – their collapse would have wiped out pay-checks and savings.
If companies do not feel confident about the future they cut back on their
inventories, playing havoc with their suppliers. Loss of confidence also means
it is harder to get lines of credit, while those hard against the wall will
struggle for support from banks and investors trying to cut their losses.
Confidence is vital for the system, which is why commentators get so
excited by signs of growth as a way of measuring its return.

Green shoots
The problem is that the commentators are reading at lot into figures that
are easily distorted because the volumes of sales are so low, that a single

12
abnormal event can have a disproportionate effect on the figures. In a
standard system anomalies are averaged out, but in a low volume system
they have the power to greatly change the average itself.
A so-called green shoot may just be a change in the rate of decline, not a
growth in itself. Just because the bad figures are slowing down, does not
mean they are getting better or that they have reached the bottom, simply
but that they are getting close. They could remain on the bottom for some
time. Nor does it account for the fact that at the bottom of a market there
can be apparent significant rises relative to recent lows, before further falls
happen. Markets have to be taken as a whole for predictions to hold weight.

Property Prices
House prices are an important economic player as mortgages are the
largest single debt most people have. With house prices having fallen, it
removes a large chunk of money from the economy. People with mortgages
worth more than their houses are currently valued at (called negative equity)
are far less likely to spend. People “unlocked the equity” in their houses by
taking out new mortgages, giving them easy access to money, which was
fine as long as house prices rose. This money seeded part of the consumerist
boom underpinning the recent financial speculations, both in the mortgages
themselves and in providing access to ready cash home owners to spend.
As well as mortgages, housing also drives another significant player in the
UK economy, the construction industry. Thus low prices in the housing
market will cause it to stagnate and drag heavily on the rest of the economy.
The current house price fall may also be followed by a commercial property
price collapse, something which will hit the big suppliers of finance who have
sunk a lot of money into it over the last decade.

Private Debt
Private debt, both of individuals and corporations, is another ticking bomb
under the UK's financial health. Companies are used to budgeting for low
interest rates, and it has become common practise to ignore the clauses that
put up the rates after a few years. Others are simply short term loans. The
assumption is that you simply just re-finance though other sources on just
as low rates, that is get another cheap loan to pay of your existing one, so
you do not have to pay back the capital in one go.
These roll-over debts, as they are called, are start coming due over the
next few years. However, the debt crisis means this refinancing will be
harder to come by and at higher rates than planned for, causing pain for
people and businesses alike – at the time when the Government will be
expecting to see a recovery to deal with its own debt.
Hence the pressure to keep rates low. However, low rates are unsustainable
when there are high levels of debt and there are a number of financial
aftershocks still to come once the wider effects of the crisis trickle down.

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The Exports-Imports and Sterling Exchange Rate Tangle
Currency exchange rates are how the purchasing power of Sterling relates
to the purchasing power of other currencies such as the Euro or US Dollar. To
make money the country needs income (ie. revenues). In basic terms this
translates to exporting manufactured goods and services. For this to work
the price of goods in the UK need to be competitive with the rest of the
world, and prefers low exchange rates.
Low exchange rates however mean that the ability to buy in the resources
to make those goods is hampered as the Sterling does not buy as much. It is
a difficult balancing act at the best of times.
With large amounts of money going to service debt, foreign investment is a
crucial source of money to grow the manufacturing and servicing industries,
and investors are also concerned that the value of their money is being
preserved. This is jeopardised by a falling exchange rate. This will make life
more difficult for a government seeking buyers for its own debt.
High and low exchange rates have different beneficial effects for the
economy, so there will always be arguments in favour of each. However,
there is a well established theory called Mundell-Fleming which basically says
that at any one point the government can control two out of three of
1. its fiscal policy (tax rates & spending);
2. capital flow (people taking money in & out of the country);
3. currency exchange rates
What Government cannot do is achieve all three at the same time. It can
tinker in the short term but there will always be a rebound. We shall not go
through all the permutations here, but the point is that the UK Government's
ability to act later on is tied by the decisions it is making now.
At the moment it is keeping a control over its fiscal policy by increasing
debt to allow tax breaks and avoid cuts. The low base rate, needed to
stimulate the economy is discouraging investors, so the third factor, the
value of sterling is falling as a result. This means the purchasing power of
the pound is dropping. In turn the cost of servicing foreign debt is going up,
adding more to the bills faced by debt laden companies and the Government.
The books are becoming harder to balance. It is very hard to get right, and
simple to get wrong. The politicians for once are little to blame as whatever
they do, they are going to be damned on some front.
If it gets it really wrong, and the economy lurches even further downwards,
as is increasingly looking likely, then the creditworthiness of the nation itself
becomes under threat. As a leading western economy, the UK has enjoyed a
triple A investment rating, which basically says its is a safe bet for putting
your money into. This is now under threat, and a drop in credit rating means
that many of those buying debt will pull out and everyone else demands
higher interest rates to cover the risk. And that ultimately leads to increased
interest bills for the Government and inflation, both of which are bad for the
economy.

14
The Pensions Crisis
2012 is the beginning of the baby boomer generation leaving employment
and taking their pensions. A big question exercising the minds of the
economists looking at this is whether there is enough money to fund the
payouts they are expecting?
Pension funds are rarely in a healthy position, not even when times were
good. They are very exposed to the share and bond markets, and the crisis
has left them with large holes in their finances. Should the private pension
system start to fail, or is unable to meet the demands of those who have
taken out policies with it, then the government is left taking up the shortfall.
In economic terms, pensioners consume more of public finances than they
put in, as they do not produce goods or services, while they requiring people
to look after them as well. Increased life expectancy means that the strain
on the system, especially the NHS, will last even longer. Another problem for
the economy is that the retired generally spend less and save more.
This is not to say that we are against pensioners, but that from an
economic point of view ageing populations do raise problematic issues,
especially when the Government is in the situation of having to fight on
multiple fronts all demanding funding, or cuts in the services it provides.

Unemployment
Figures for employment generally lag a year behind those of the rest of the
economy. For example, the fall out of the worst of the financial crisis seen in
2008 is only now becoming apparent in the dole queues. Likewise, rises in
employment is not going to be seen until a year after the economy starts
rising out of recession.
However, in the meantime the unemployed are both taking from
government coffers while not contributing to the economy. Increasing
employment takes money, private and public, to finance expansion, research
and development, and to establish new businesses. The questions are
whether the governments can provide the public money, and if banks and
foreign investors have enough faith in the UK to make that investment. With
greater opportunities available in new industrialized nations (e.g. India), and
questions over the UK's financial stability that funding is not guaranteed.
An alternative is the New Deal approach, in funding massive infrastructure
projects. However, there is little scope for that left in a mature country like
the UK, and the consequences for the natural environment are frightening.

But what about tax cuts?
The other way of stimulating the economy available to the government is
tax cuts. This is very unlikely to happen, as it would have to raise even more
in loans to cover expenditure.
The cut in VAT to 15% was a short term measure to encourage consumers
back into the shops. However, in 2010 it is due to go even higher to 20% to

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make up the short fall the existing cut has made in government revenue. If
there is not a well established period of growth by then, and a return of
confidence then this will do more damage.
Not to put up VAT blows an even bigger hole in the government's budget
and may dent confidence of foreign investors as it shows the government is
not seeking to tighten its own belt.

Deflationary Pressures
The opposite of inflation, deflation is when the cost of living actually falls.
There is concern that the UK and some other European nations are in danger
of dropping into a period of negative growth – that is the economy shrinks.
In the immediate term, this is good for consumers as it means their money
buys more – but only for those who have the money to spend. Those with
debt have a bigger problem, for as the value of debt falls under inflation, it
increases under deflation.
This will create more problems for the UK. Not only because its debt
becomes bigger, but because deflation means that the economy is not
growing, and consumers are not spending. Investors will not give their
money to an economy that does not give them growth.
As we write, economists are arguing which is coming, deflation or high
inflation, but nobody can be sure just yet. Neither is particularly good.

Insurance Companies
For insurance companies who have to make pay outs, deflation is a major
danger. Though hit by falling share prices, they have been well protected
against the financial crisis, partly through lack of Hurricane Katrina type
events. However, if deflation sets in it could send a wave of bankruptcy
though the insurance industry.
The problem is that it is very hard to do anything without insurance these
days, and increased premiums will further depress the economy. One of the
important unseen functions of insurance is backing business deals. If a bank
loans to a hedge fund to make an investment, or extends a credit line to a
retail company to purchase the next set of goods to sell, it will take out
insurance in case the hedge fund or company cannot pay the money back.
When you are talking billions upon billions this makes business sense.
But what if the insurance companies cannot pay out, or are no longer able
to offer the insurance in the first place? Most people will have heard of
Lehman Brothers going bust, but at the same time the world’s biggest
insurance company AIG was also collapsing. It insured something like 90%
of global business deals. If it had been allowed to collapse then the financial
world really would have gone into total meltdown.
Insurance allows a degree of confidence by shifting the risk elsewhere, but
only if the insurance companies themselves are financially sound, and they
are not out of the woods yet.

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But the banks are making profits and stock markets are rising...
The situation is more intricate than simply assuming that a growing
economy means growth in profits and share prices.
A lot of it is built on the assumption there is demand and growth around the
corner, so now is the time to start buying up low prices stocks. Once again it
is belief and confidence running the show. It is being driven by profits
coming in from companies with a large global presence, such as oil and
finance. Oil shares are doing well because they have found reserves,
financial companies because as they are profiting from advising the debt-
laden companies they got into trouble in the first place.
There is also hope that countries such as China are helping stabilise the
world economy by changing strategies in “emerging” markets, so giving the
promise of growth there.
A third, lesser known effect is that as a currency drops in value, the stock
market rises, to reflect the change. Once the shares become cheaper relative
to their absolute value, foreign investors come in and push up prices.
Connected to this is the value of the pound to other currencies, in particular
the dollar which is falling, so what is happening in the US is causing funds to
flow into the UK, but this is likely to be temporary.
None of this actually creates wealth. It is all dependent on a return to
growth, and fuelled by low interest rates meaning that once more there is
cheap funding to be had. This is potentially another speculative bubble, and
if consumer markets do not recover at the same speed, there will be a fall
back in prices. Many of the companies reporting profits are not doing so on
increased volumes of sales but through price rises and cost cutting
measures, so there is little actual consumer based growth taking place.
That governments such as the UK & US are increasing their debt to protect
their economies in the short run is also distorting the markets which have
yet to factor in the effects of cuts.
When you look at countries like Japan, which have gone through this sort of
financial crisis before, 50% plus rises in the stock market are not
uncommon, but there are always significant corrections a year or so later.
Currently we are still quite a way off previous peaks in the stock market.

Other economic fears
1. The banks are still not leading. A year after Governments propped
them up, and basically started printing money on their behalf (hence
quantitative easing) credit continues to shrink. This impedes consumer
spending and slows down business expansion.
2. Growth cannot just take place in one industry; to be stable and be a
genuine reflection of the economy, growth must take place across all sectors.
3. That the next generation of consumers will become savers rather than
spenders, withdrawing capital from the markets, so again impeding growth
with an end of the consumer boom.

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Is there a way out?
It is all pretty scary stuff. The UK economy is in a pretty shaky place and
there is plenty of stuff that we have not gone into here that have still to be
faced up to.
The main point is that the government is engaged in very short term
thinking so storing up lots of problems for the future, particularly high
interest rates. We hope that by reading this you have a somewhat better
idea of why currency exchange rates, Bank of England base rates, housing
prices and the like are so important to the economic health of the country.
Like us, you may even think, well bloody great, it is about time capitalism
got what was coming to it. But the real point is that the world the UK has
existing in for decades is coming to an end. There is a chance that what is
happening to the likes of Ireland, Iceland and Latvia will happen in the UK. It
is unthinkable, and may not yet happen – the world is too unpredictable for
that - but it is a possibility.
Certainly, the UK is in danger of being edged out of the first tier of players
in the financial world to which it has pegged its well-being. What is only now
being realised is just how much of our standards of living have been
dependent on that position. There are major geopolitical shifts with the rise
of the BRIC nations as players in the financial world. The inevitable rise of
the G20 over the G8, a natural consequence of the financial turmoil,
weakens the UK's wider political and economic influence and thus its ability
to bring in the profits our standard of living depends on. Borrowing is
maintaining these standards but at the cost of weakening the UK's standing
in the rest of the world. Eventually that will come home to roost. Without the
finance to go out and be capitalists the UK will be relegated to the second
division unable to compete with the likes of China's purchasing power when
it comes to buying necessary resources.
There is no choice but to make the cuts in government spending, it is
inevitable, and it is going to hurt. There will be a contraction of the economy
with a reduction in the standards in living through lower incomes and higher
unemployment, even cuts in benefits and service such as the NHS as the
government tries to balance the books. If it does not balance the books, then
the investors will pull out altogether and that will be a lot worse. The
government cannot default on its debt as that will cause a panic in the
market and make it impossible altogether to raise any of the money it needs
to survive. Unfortunately, there is little realisation of how dependent we are
on the foreign money markets.
We cannot rely purely on raising manufacturing output or deeper structural
adjustments in the economy as this dependent on too many factors outside
the Governments control. And there is still the question of our access to
resources. The chances are the pound is going to remain weak, causing us to
pay more to buy in the oil and iron ore – in turn dissuading further foreign
invest, when it can be done cheaper elsewhere.

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What does this mean on the streets?
We think it will lead to political unrest as much of what we have taken for
granted is under threat. Even as activists we in the UK have been very
sheltered from the rest of the issues facing the global economy. We have a
welfare state that was founded on promises of income from a rich economy
sustained by its place as one of the leading countries of the industrialised
west. This gave the UK the power and wealth to continue to exploit long
after its own resources had peaked.
The lessons of the 1970s have been mostly forgotten; a large chunk of
those of us active today were only born in that decade. Since then we have
lived through a society changed by Thatcher and Blair to one of selfish
individualism, filled with expectation as to what is supposedly rightfully ours.
Those “rights” to cheap holidays and all sorts of food when we want it came
with a price paid by others. We are not as a nation in much position to
continue with the sort of extortion that funded it. Certainly not now with
China, India and the rest of the world far more able to compete for the same
resources than we are able to.
As a society we have changed to one much less unionised and less social
cohesion, while having been encourage to ever higher expectations.
Governments can promise much but their ability to deliver is reduced.
There is the very real threat of high inflation, which we believe is the most
likely long term effect of the financial crisis and the one which will affect the
average worker the most. High inflation (or even hyperinflation) takes
money out of people’s pockets and threaten their mortgages and jobs. It
wipes out people's savings and reduces the value of investments. There will
be no scope for public sector pay rises to match this, resulting in a reduction
in the standard of living, curbs on employment rights, and a long recession.
This and other factors laid out above we think set the course for a
prolonged period where the country as a whole becomes poorer, and many
more people experience precarity in their lives as the standards of living and
average income drop, and the threat of unemployment becomes stronger.
As ever it is going to be the lower skilled workers and those dependant on
the welfare state that will be first on the receiving end of the cuts the
Government is going to be forced to make. A new generation is finding it
increasingly hard to get jobs but already laden with debt from university, and
simply not able to get on the housing ladder.
Many of the current strikes have their roots in the economic changes being
wrought by the financial crisis. Cash strapped local authorities are going to
be forced to cut back; the likes of the NHS are going to have to turn more
and more to private sources of funding to continue to pay its staff. It is
naivety to simply demand more money from government. Too often society
focuses on relatively minor expenditures in the grand scheme of things, such
as MP's expenses, but ignores the major financial shifts behind the scenes.
Though the bosses remain the problem, strikes alone are not going to allow

19
us to maintain the standards of living demanded, not when the money to
fund it does not exist in the first place
The UK is not ready for the shock of the transition to being no longer one
of the globes most affluent countries, and the Government is failing to
prepare for the nation for the inevitable. If there was just the financial crisis
to worry about this could be done over decades. Climate change and peak oil
/ resources are going to accelerate the process, and that is not being
budgeted for.
A key questions is whether the decline is going to be sharp and fast, or
slow and drawn out. A shocked public is open to all sorts of suggestions, but
if we are not ready to confront right wing or authoritarian left propaganda
then we will lose the opportunity to make more fundamental changes to the
system, to show that the grassroots really can provided the way forward.
First and foremost, we need to be wary of the growth in power of the
reactionary right who will seek to scapegoat minorities for these problems.
Economic turmoil is the ideal breeding ground for them.
At the same time we have to manage expectations. The Left continues in
its belief that all can be restored, that the same standards of living can be
enjoyed by all under a socialist government. Sadly to say, the biggest and
most damning effects of the financial crisis is going to strip away the illusions
of self-sustainability that we have about our society and show that we are
now even less capable of responding to the crises of resources – oil, water,
minerals – and that of climate change.
There is also a danger that we allow the economic crisis to take precedence
over other issues, accelerating the exploitation of the planet to maintain the
unsustainable standards of living. We cannot bury our heads and preach in
favour of the workplace, when the workplace itself is increasingly unviable.
Economics is underwritten by resources; capitalism by ever increasing
exploitation of those resources. Socialism seeks to replace capitalism but it
has few if any answers for the exploitation of resources when they become
scarce. We can no longer depend of 19th Century thinkers as the economic
world has moved on from the time of Marx and co.
We do not provide answers, but highlight how often the solutions proposed
by the Left are mired in unseen assumptions. Hopefully we have exposed
some assumptions so that more realistic solutions can be developed in their
place. As painful as the economic crisis is going to be for Britain, it will also
open up a space for us to advance ideas built around sustainability rather
than exploitation – but only if we are prepared to seize the moment.

In Part 2 we examine the unacknowledged assumptions behind our
concepts of how the UK functions in terms of infrastructure and how the
changing world affects them. These will combine with the financial crisis to
affect everyone’s responses to the challenges of climate change and resource
scarcity which open up a whole new set of challenges.

20
Glossary

Speculative Bubble: when investors get over excited about a particular
type of investment which promises great rewards (tulips, internet
companies, house prices) and pump in so much money it expands the
market like a bubble until it overextends itself and bursts.
South Sea Bubble: the original big speculative bubble based about a UK
company trading with South America, which delivered huge losses to its
investors rather than the great profits it promised.
Sub Prime: generally loans given to people with poor credit ratings, often
with penalizing interest rates which do not come into place for several years;
mostly used to classify mortgages.
Profit Margins: a measure of how profitable a business is; the ratio of
profit to the cost of selling the product. A higher margin means more profit.
Neo-Liberalism: the politics of transferring as much as possible of public
services into the private sector; the defining policies of global financial
players such as the International Monetary Fund, World Bank, etc.
Leverage: using the promise of future profits to take out loans now so as
to be able to fund even more business deals; also a measure of how much a
firms' is dependent on debt for financing its business – lots of debt translates
to being highly leveraged.
Shadow banking: that part of the financial world other than banks;
involves the (mostly) unregulated movement of money around the globe,
includes hedge funds, venture capitalists, pension funds, etc.
Hedge Funds & Venture Capitalists: financial firms involved in raising
money so it can be invested as profitably as possible. They are involved in
every type of business deal imaginable.
Investment Bank: a bank that makes its money from investments and
business deals rather than the more traditional savings and loans model
Pension Funds: the private & public companies who take the money
invested for your pension and ensure it keeps its value so there is a decent
amount to provide for you on your retirement. They own about 1/3 of the
stock market
BRIC Nations: Brazil, Russia, China & India – the leading players in the
emerging countries; the new boys on the global economic bloc.
Base Rate: the interest rate set by a nation's central bank for the interest
paid on government debt, but used as the basis on which the interest rates
of many other types of loans are also set.
Inflation: The measure of how the cost of living has gone up from the
same time the previous year; deflation is when it is going down.
Gross Domestic Product: the amount of money a country makes in a
year – a measure of how rich it is.
Capital: another word for actual money, not the notional figures recorded
on a bank's balance sheet.

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Resources

For an excellent introduction to the world of high finance check out
Nicholas Hildyards' Financial Bricolage at
http://www.thecornerhouse.org.uk/summary.shtml?x=562658
Or for how governments reacted to the crisis Paul Mason's Meltdown.

There are many useful websites out there on financial systems, but we
liked, among others

And don't forget to read the Financial Times, Wall Street Journal or the
business pages of the likes of the Times and the Telegraph, the latter in
particular, and we always enjoy the naked cynicism of the Alex cartoon.
There is a lot to be learned from them, and you soon learn to see your way
through the political dross to the stories underneath.
The real warning signs of coming change are rarely going to be plastered
across the front pages until its too late. They are going to come on the
middle pages, the information to be sifted out and added up. Strip out the
ones with the obvious agenda and dig for the facts underneath.
When the credit rating agencies threatened the UK's prize triple A rating,
the papers were outraged at New Labour, etc, but the real story was why
they were even considering such a drastic move. The trends are there to
spot.

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About Us
Dysophia is a new imprint for publishing pamphlets and zines exploring
issues around green anarchist thought in a way that makes the issues
accessible to everyone. We try to avoid dense theory, but give the knowledge
to empower and make up your own minds.
For us green anarchism is a powerful tool for analysing much of the world
around us, from interpersonal relationships to how we take on the big
problems standing between us and our ideal society. We want to educate and
encourage debate, to question everything then bring it together with solutions
that take us forward. We are not interested in prolonged bickering over moot
points, but celebrate our diversity and our common ambitions.
It is okay to challenge each other, it is okay to disagree. Knowledge does not
have to be unified, but through honest and open discussion everyone can
benefit and make up their own minds. Anarchism, innit.
We are always interested in feedback, suggestions of topics to cover or even
ideas of articles you would like to write for us. We will try to respond to all
emails, but we cannot promise, and as much as we like debate what we
ideally want are direct responses we can put into future publications.

Currently available issues are
Green Anarchism: a political toolbox (Dysophia 0)
The Crisis of Crises Pt1: The Financial Crisis (CC1)
The Crisis of Crises Pt2: Peak Resources & Climate Change (CC2)

For more information email dysophia@riseup.net or write to
Dysophia, c/o CRC, 16 Sholebroke Avenue, Leeds, LS7 3HB
No subscriptions or website, but may be someday. In the meantime find us at
bookfairs, infoshops and the like.